Healthcare worker Cleveland Wishop landed at Baltimore-Washington International Airport last fall hoping to retrieve his car from the long-term parking lot and fly home.
It never crossed Wishop’s mind that it had fallen into one of the economic traps stemming from the COVID-19 pandemic.
His blue Camaro was missing. The dealer who had sold him the 2010 car a year earlier seized it after Wishop was only 19 days late in making its payment in August.
“I was pissed off, extremely,” Wishop said.
In the past, car dealerships and lenders were slower to take cars back when borrowers fell behind. Finding and taking back vehicles was often difficult, sometimes even risky. And cost recovery on seized vehicles was a losing game.
But the pandemic has changed that.
Global supply chain issues continue to cause chronic shortages of many vital products, including the computer chips at the heart of modern cars.
And that has led to an unprecedented rise in used car prices, as production of new vehicles remains limited.
Based on government surveys, prices for used cars and trucks rose 43% in June compared to August 2020, when they started to jump. For new vehicles, prices increased by 17% over the same period.
This pandemic-related surge in demand for used cars and trucks has turned the repo game upside down.
Now, a dealer who quickly takes possession of a vehicle can expect to resell it quickly, sometimes at a much higher price.
And thanks to the prevalence of tracking technology, finding vehicles is quite simple.
Automatic repos had declined in previous phases of the pandemic as lenders gave borrowers more breaks. Although statistics for this year are not yet available, title companies, government regulators and many people involved in auto collecting and auctions say seizures are increasing dramatically, especially for passenger cars. ‘opportunity.
“There was a period for a lot of creditors, they were postponing earlier in COVID,” said Colin Welsh, a Woodland Hills attorney who works with borrowers and has fielded many other repo calls. “It has diminished, and now they are seizing the moment.”
Mark Lacek, a Florida repo who has recovered more than 10,000 vehicles since the 1970s, predicts the trend will only grow.
“I expect to be super, super busy,” he said, adding that technology has streamlined repo vehicle allocation and finding. Like beachcombers with metal detectors, Lacek said, a small army of people with license plate reading cameras mounted on their cars roam the streets, waiting for a ping to alert them when they come across a vehicle in the street. repo database.
In the Wishop Camaro case, Caspian Auto Motors of Stafford, Va. resold the car within two weeks and is now suing Wishop, of Petersburg, Va., to pay off the balance owed on the interest rate loan. raised four years. .
Wishop, while acknowledging its checkered credit history, says it is pursuing its own legal action against the dealership.
“They got paid twice for the same car,” he said. “That was their goal. It’s their game.”
Caspian handlers did not return calls.
Car prices have risen so much that Robert W. Murphy, a Fort Lauderdale, Florida attorney who represents borrowers, said he even charged two clients several thousand dollars each after their cars were repossessed. and sold at auction.
This is because, by law, proceeds in excess of the loan recovery amount must be returned to the borrower.
“Neither put money, no equity, no skin in the game, and they both got checks,” Murphy said.
Cars have been a major factor in soaring inflation across the country, which is at its highest level in four decades. In the years leading up to the pandemic, used vehicle prices remained virtually unchanged.
At the same time, a growing number of consumers are beginning to fall behind on car payments.
Not only is inflation weighing on household budgets, but government pandemic aid checks have stopped flowing, and many people who boosted their savings accounts during the early stages of COVID are seeing those balances. start to decrease.
Delinquencies on consumer auto loans began to rise, especially for young debtors and subprime mortgages. Auto loans more than 60 days past due rose 30% in May from a year earlier, though defaults so far remain below pre-pandemic levels, Cox Automotive said.
American consumers currently have auto loans totaling $1.4 trillion, double the amount 10 years ago and now more than credit card debt, according to the Federal Reserve Bank of New York.
If the economy falls into recession and more people lose their jobs and incomes, households will feel increasing financial stress.
The average monthly payment on a used car loan now exceeds $500, says Bankrate.com. That’s about $650 for new vehicles, with one in eight borrowers having to pay $1,000 or more per month.
If the value of used cars weakens in the coming months — and the increases are already starting to moderate — many consumers could find themselves with upside-down auto loans.
Some analysts say the situation is frighteningly similar to the subprime mortgage crisis that led to the Great Recession in 2007-09.
Although most economists do not foresee anything like the financial crater at the time, they nevertheless fear that the imbalances in the auto industry and financing could cause significant problems for consumers and lenders, especially those who weigh heavy on the subprime market.
Credit unions, with their reputation for lower interest rates and lending to diverse communities, have seen tremendous growth in used car loans. Credit unions now account for about a third of the auto credit market in the country.
Mike Schenk, chief economist at Credit Union National Assn., says the data suggests about a quarter of credit union borrowers have scores below first, meaning they’re more likely to have problems. financial difficulties and falling behind on car payments.
Schenk called the concerns overblown, saying auto loan delinquencies over 60 days have only increased slightly for credit unions and remain at historically very low levels.
But some lenders are starting to feel more pressure.
The Pentagon Federal Credit Union has one of the largest portfolios of used auto loans, about $3.6 billion in March. That’s a whopping 80% increase over the previous year. In March, the dollar volume of accounts past due for 60 days or more more than doubled from a year ago to about $45 million, according to quarterly filings.
Other lenders may face higher risk due to their large exposure. In Orange County, Westminster, LBS Financial Credit Union, for example, automobiles account for 70% of its total loans. Neither Pentagon Federal nor LBS Financial would comment.
“You see some financial institutions, including credit unions, pretty deep in risk cars, and if this market suddenly and viciously turns, they would end up on the wrong end of a speculative bet,” said researcher Aaron Klein. principal at the Brookings Institute.
He noted that the pandemic, by inducing massive sums of federal stimulus money and an abnormal increase in the value of cars, masked underlying problems in the used car market, particularly in the subprime segment at rapid growth that has long been troubled by discrimination and unsavory practices. .
Massachusetts and a few other states have cracked down on car dealerships and subprime financiers.
Although lenders can legally seize vehicles from borrowers who are more than 10 days late — and in many states without prior notification — it is illegal to “breaking the peace” by doing so, said John Gayle Jr., a consumer rights attorney from Richmond, Va., and co-author of the state’s lemon laws.
He said differences in state laws can create gray areas for repossession operations, but almost anywhere it would be against the law if it could lead to any type of violence or if the repossession took place in the yard or private property of a car owner.
Iieska Packard of Fresno, a 43-year-old licensed vocational nurse, was at her company’s office last year when a colleague asked, “Isn’t your car being towed?” Packard ran down the stairs and out the door, but it was too late. His 2017 Lincoln MKX was missing.
“I didn’t know what was going on. At first I thought it was theft,” she said. Later, Packard learned that her SUV, which she had purchased only a month earlier, had been towed away by an unmarked truck.
She said the dealership, LA Auto Exchange in Montebello, told her the financing was canceled because he couldn’t confirm his employment.
LA Auto Exchange officials were not returning calls. The dealer is in arbitration with Packard’s attorney, Welsh of Woodland Hills.
When Packard bought the vehicle, she bet $2,000 on a purchase price of $21,285 including sales taxes and fees. She financed the rest through the dealership with a six-year loan carrying an annual interest rate of 26.2% – even higher than the average 9% to 20% rate at which subprime car buyers are face, according to the Consumer Financial Protection Bureau.
The sales agreement stated that Packard’s financing costs over the term of the loan were $19,561, more than the principal originally borrowed.
Packard, a mother of two, says her credit has been hit after falling behind on student loans and medical bills. But having your car taken over like that “was frustrating and embarrassing,” she said. “Everyone in the office was there.”